Tesla stock surged 6.25% on Nov. 2, but it wasn't because its sales and profit have recently been rocketing. The electric vehicle company's third-quarter revenue and earnings were relatively lackluster, missing analyst's consensus estimates.
The company's disappointing third-quarter performance contributed to a 17% drop in Tesla TSLA shares after the quarterly earnings report was released.
However, stocks don't fall in a straight line, and the decline may have created the perfect setup for a relief rally. All Tesla's stock needed was a spark, which it got when an outspoken billionaire investor unveiled a surprising price target.
Image source: FREDERIC J. BROWN/AFP via Getty Images
Why Tesla's sales have struggled
Electric vehicle sales continue to grow more quickly than traditional internal combustion engine vehicles. According to Cox Automotive's Kelley Blue Book, EV sales grew nearly 50% in the third quarter, much faster than the mid-teens growth reported for all cars sold in the United States.
Tesla remains the EV Goliath. However, its sales grew more slowly than the EV industry itself. Across all of its models, including its top-selling Model Y and Model 3, Tesla vehicle sales climbed by only 20% in the quarter.
Related: Tesla’s EV throne is being chipped away at by this surprising luxury brand
The company reported revenue grew only 9% in Q3 from one year ago, far below its average 48% annual growth over the past five years. Earnings per share declined 37% from last year.
On Tesla's earnings conference call on Oct. 19, CEO Elon Musk conceded that Tesla demand has been dinged by rising interest rates impact on lending. Since March 2022, the Federal Reserve has boosted interest rates by 5.25%, leading banks to tighten lending standards and increase rates on auto loans.
Tesla has tried to offset some of the affordability problems by tweaking vehicle retail prices; however, lower prices have negatively impacted vehicle profit margins, reducing the company's profitability.
More Business of EVs:
- A full list of EVs and hybrids that qualify for federal tax credits
- Here’s why EV experts are flaming Joe Biden’s car policy
- The EV industry is facing an unusual new problem
The company is also facing off against a growing list of new EV competitors. Many automakers have recently launched new models, cutting into Tesla's sales. For example, Mercedes Benz's EV sales grew 284% from one year ago in Q3, likely offsetting some demand for Tesla's expensive Model X and Model S. In the lower-priced category, Hyundai's EV sales jumped 237%, likely taking some share away from sales that otherwise might have gone to the Model 3.
One billionaire thinks Tesla could be multi-trillion dollar company
Despite Tesla's recent numbers, billionaire Ron Baron remains bullish about the company's future. Baron, the CEO of Baron Capital, a growth-oriented money management firm with over $41 billion in assets, has owned Tesla stock since 2014.
In a Nov. 1 interview, Baron said that his Tesla investment has made him over 20 times his investment, and he believes it will make him "another five times" in the next seven to 10 years.
Baron's confidence stems from the fact that his research suggests that Tesla won't just be a car or battery company. It will be Tesla technology that enables autonomous driving in all cars someday.
The potential for Tesla, which has a $694 billion market cap, to eventually become a multi-trillion dollar company caught the eyes of Musk, who responded on X, formerly Twitter, that it's possible.
We do need to knock the ball out of the park several times to achieve that value, but I think we can
— Elon Musk (@elonmusk) November 2, 2023
It will take many things to go correctly for Tesla to deliver on Baron's target. However, Musk's track record suggests investors might want to give him the benefit of the doubt, something it appears many did today.
